Mechanical versus Discretionary Systems

After finally importing 2 more years of intraday data, my Dooku trading system has failed to backtest well using 4 years of intraday data.  Where does this leave me?  In a word, LOST.

I need to investigate furthur the recommended methods to backtest a trading system.  Of course I realize that past results don’t guarantee future results but I need to understand it more.  1 question I need to ask myself is:  Will my system will be totally mechanical or a discretionary system?

Here are some good pros and cons of both:

Mechanical systems

Advantages 1. This kind of system can be automated and backtested efficiently. 2. It has very rigid rules. Either, there is a trade or there isn’t. 3. Mechanical traders are less susceptible to emotions than discretionary traders. Disadvantages 1. Most traders backtest Forex trading systems incorrectly. In order to produce accurate results you need tick data. 2. The Forex market is always changing. The Forex market (and all markets) has a random component. The market conditions may look similar, but they are never the same. 3. A system that worked successfully the past year doesn’t necessary mean it will work this year.

Discretionary systems

Advantages 1. Discretionary systems are easily adaptable to new market conditions. 2. Trading decisions are based on experience. Traders learn to see which trading signals have higher probability of success. Disadvantages 1. They cannot be backtested or automated, since there is always a thought decision to be made. 2. It takes time to develop the experience required to trade successfully and track trades in a discretionary way. At early stages this can be dangerous.

Dooku Reversal

Sticking with my trading system to start the week off has paid off.  Dooku generated some realized profits this morning when I closed out 2 positions +$1000.  I have since reversed 1 position that Dooku generated after the exit. 

Trading with a plan is so much easier than trading without a plan.  Where the emotion was so evident before, now it just isn’t as much of a factor.  I still don’t know if this trading system is the answer to making a consistent profit but I like the feeling that having a plan gives me. 

Trading System signals

I still have two short GBP/USD and EUR/USD positions from last week that were opened due to signals that my Dooku trading system generated.  The market hasn’t been doing much since then yet I’m sitting on an unrealized profit of $500. 

Yesterday I stated that my trading system had a profit target of 225 pips and a stop loss of 75 pips.  Though these are the stops and limits I place on each trade, my trading system can generate reversal signals that prevent my profit target from ever being hit.   The most I can lose on any given trade is 75 pips.  Generally if the trade moves at least 50 pips in my direction, I’m usually guaranteed that I will profit from at least these 50 pips.  It’s when it moves above this when I have a chance of realizing the 225 pip profit target as long as my trading system doesn’t generate a reversal signal.  In backtesting, my maximum profit target was not hit as often as my maximum stop loss but forward testing should give me more insight on how this trading system will perform in the long run.

I’ve been busy trying to import 5 years worth of intraday data into Amibroker for backtesting.  I know I was talking up Amibroker like it was the greatest thing since sliced bread but 1 drawdown is the fact that they use flat files for historical data as opposed to an optimized database.  What this means is that as more and more data is added, the slower and slower it is to import.  I figured the import of 5 years of 1 minute data for 10 currency pairs will take about 2 days for a single cpu pc at 100% utilization.  Unfortunately I don’t have a dual-cpu or dual core system right now though I’m very tempted to buy one. 

Dooku Forex Trading System

I started to work on multiple trading systems over the last week or so and realized that I was falling into the same trap of trying to do too many things at once.  I decided this weekend to work on my first trading system more.  The first thing I did was give it a cheesy name so that I can distinguish it from all the others.  I have named it Dooku.  You can figure out on your own where I got this one from. 

This system was previously being tested on hourly charts with a risk reward of 1:1.  It tested well with a 50 pip stop loss and a 50 pip profit target.  The first thing I wanted to do was to get the risk reward to 3:1.  I successfully accomplished this and Dooku tests very well on the hourly charts with a stop loss of 75 pips and a profit target of 225 pips.  

I will forward test this system this week and going forward to see how it performs.  From my backtesting, it has never had a losing month.  I will forward test this with real money and 1 lot each trade.  I will use a 75 pip stop and a 225 pip profit target.  I will trade only the GBP and EUR.  From my calculations, this system will generate an average of 20 signals a month for each currency pair.

Wide Screen LCD for trading

I’m a little behind when it comes to buying computer equipment.  From being in the business for quite some time, I have a lot of spare equipment laying around so I never feel the need to go out and buy anything.  I did just make a purchase today though.  I ordered a 20.1 inch wide aspect flat panel from Dell for under $500.  I’m looking forward to viewing my charts on this screen as opposed to my 15" Flat.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wave Analysis for Multiple Currency Pairs

The fibo-group submitted their wave analysis to my forex directory yesterday and it’s pretty interesting stuff.  Here’s an example of the commentary and respective chart for the Daily USD/CAD:

The pair reversed sharply, having broken the second critical level. No “Signal line” of the descending “Andrew’s pitchfork” degree Minor is broken. That’s why it is too early to talk about reversal. We see retracement. The depth of the retracement is seen as the “Reaction line 23,6%” of the “Andrew’s pitchfork” degree Intermediate, drawn from the last wave pivots of this wave degree. The pair forms pivot on this “Reaction line” in 80% of all cases.
This suppose is confirmed by the fact that this resistance level is marked by the “Upper signal line” of the descending “Andrew’s pitchfork” degree Minor.

 

 

 

 

 

 

 

 

 

You can check it all out at http://www.fibo-group.com/pages/505

Week 15 performance

This week was my 4th straight losing week.  I lost $1220 this week which drops my overall profit over 15 weeks to $1243.  Even though my P/L isn’t looking good as of late, I really am not discouraged.  I have the confidence and determination to continue onward and I have the belief that I will be successful.  I am just going through the stages of learning and if it costs me money to learn, so be it. 

This week I used my first self designed trading system and followed through on every signal it gave me.  Unfortunately it is a range trading system and the EURO had some pretty nice gains against the dollar this week.  Therefore, my trading system did not perform well.  I will continue to use it.  I will stick by my hours upon hours of work. 

Do Trading Systems Work?

I’m staying on the trading system subject today because I was reading a transcript of an interview performed yesterday between FXSTREET and Markus Heitkoetter, President of Rockwell Trading.   The subject was "Trading Systems: Do They Really Work?"

Markus’ most important comments follow:

• - Like all other ventures, "having a plan" will give you an edge
• - A trading system consists of a set of rules; in it’s simpliest form a trading plan (or system) has entry and exit rules.  More sophisticated trading plans include position sizing and money management
• - You MUST have a trading plan to succeed
• - At a minimum your trading plan should consist of entry and exit rules
• - The 2 types of exit rules are stops (to protect your capital) and profit targets to realize profits
• - The "lack of the trading plan" is the No. 1 reason why traders fail
• - The easiest way to follow a trading plan is to automate it
• - Trading with a system removes emotions from trading
• - If you’re looking for trading action, don’t choose a trend-following system.

Here are the top six reasons why traders fail:

1.    Lack of a Trading Plan
2.    Lack of Discipline to Follow the Plan
3.    Failure to Control Emotions
4.    Failure to Accept and Limit Losses
5.    Lack of Commitment or stop trading using your system after the first loss
6.    Over-Trading

Trading a system helps you overcome the top six mistakes

Amibroker is great and cheap

As I’ve written in the past couple of weeks, I’ve been doing a lot of backtesting.  I’ve used esignal (my data provider), metastock, and now amibroker to automate the backtesting process.  If you ask any experienced and successful broker, they will say that you are absolutely crazy to not back test and forward test your system before going live with it. Here’s a quote from an experienced trader, chaffecomb:

I’ve absolutely no idea how some people can trade without first backtesting, however that’s just the way I’m wired!   …

Check out his website.  He tracks multiple trading systems that he developed and basically trades on autopilot.  http://users.bigpond.com/morleym/index.htm 

Out of the 3 systems I’ve used for backtesting, I really think that amibroker is the best and it’s the cheapest.  Here are the pros and cons I’ve noticed for each:

Esignal

Pros:  Nice reports and graphs post-backtest; the ability to backtest already written custom indicators with minor modifications

Cons: Expensive; no ability for optimization  

Metastock

Pros:  Full featured suite of already made trading systems
Cons: I found the entire product very confusing and I’m a programmer; Expensive

Amibroker 

Pros: Intuitive user interface; fast; ability to optimize backtesting
Cons: they don’t provide data so you need to download free data or use your currency provider (esignal plugin) 

The most important backtesting functionality is the ability to optimize your trading systems.  For example, what if you wanted to backtest a moving average crossover.  With esignal, you would have to manually change the moving average periods you want to test which would require an individual backtest for each moving average pair.  With amibroker or metastock, you can use variables and have the program go through an entire range of moving averages all in one shot.  It really is a powerful feature.

I’m using amibroker now and I don’t see how I would ever use anything else.  In addition the full version was only about $250. 

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Trading Simple Is Boring

March 15, 2006

I don’t know if I’m starting to understand it but the more simple I’ve been keeping my chart analysis, the easier it is for me to identify trade opportunities.  I’ve been so caught up with technical analysis using multiple indicators, trend lines, support and resistance, keltner channels, bollinger bands, andrew’s pitchfork and many more that I never stopped to think that none of these are going to do anything except make it harder for me to make a decision.  I have to realize that NOBODY knows where the price is going to go.  If you keep it simple though and follow your plan and money management principles, you can be successful. 

Like I said yesterday, I think developing a simple trading system that will generate buy and sell signals was a turning point for me.  If I follow this trading system, I think I can come out ahead in the long run.  The way for me to make a good income is to design multiple trading systems and automate the trading process of buying, selling, and exiting.  Multiple trading system will allow me to hedge my trades preventing the "all eggs in one basket."  That way if 1 trading system had a bad month, hopefully the others will balance it out. 

Trading this way is boring.  It requires a lot of watching and waiting.  Trading was more exciting when I was seeing constant changes in my plethera of indicators.  From what successful traders have stated, trading was meant to be boring.  That’s fine as long as I’m maintaining a steady stream of income. 

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